Economic Implications of Building a Wall

April 21, 2017

Undocumented immigration and the state of border control have always been politically relevant topics. However, given U.S. President Trump’s campaign focus on border security, the issue has garnered special national attention this past election cycle. The population of undocumented immigrants has risen steadily over recent years, remaining the same from 2009 to 2014 at 11.1 million and accounting for roughly 3.5% of the total US population. [1]

On June 16, 2015, President Donald Trump announced his plan for what would become a divisive yet defining issue throughout the 2016 campaign: the implementation of a border “wall”. Now that the new president has settled in, the rhetorical has turned real, and many are wondering what a wall along our southern border will look like. Estimates of its cost range from President Trump’s proposed $8-$12 billion to New America Foundation’s comparatively higher $27-$40 billion estimate. [2] With such an endeavor, what are the implications for employment, trade, and tax policy? [3]

Construction of the Wall

Image: The various estimates for the cost of the wall are incredibly varied. Source: [Bloomberg Reporting]

There is little consensus on precisely how much the wall would cost to build. However, there is one certainty: building the wall would create jobs. [4] Nearly all aspects of the construction — from physical building to servicing workers constructing the wall will undoubtedly require workers. However, despite providing a positive shock on the demand side, our president will soon encounter a critical problem on the supply side: the country’s ongoing construction labor shortage. [5] For the president, the shortage will, at best, affect labor costs; at worst, it may compromise the general feasibility of a prompt construction of the wall.

In order to have a sufficiently large workforce to make wall construction feasible, only two options seem plausible: face the increasingly high labor prices in the construction labor market - where demand for workers is steadily increasing – or look to undocumented immigrant workers. [6] The former option presents a question of timeliness and fiscal responsibility. However, the latter - while keeping labor costs down - presents a far more poignant issue that the wall’s proponents must address. The prospect of hiring Mexican workers to build a wall dividing the two countries is, according to Michael Camuñez - former assistant secretary of commerce under President Obama - akin to “asking an East Berliner to build the wall that cuts them off from the world.”

While many are concerned with the difficulties of a labor shortage, others are quick to point out the issue of how the wall will be financed. In his campaign announcement, President Trump stated that Mexico would pay for the wall. However, after President Enrique Peña Nieto categorically denied any chance of his country footing the bill, the prospect of Mexico directly funding the work grew dim. The task now became how to have Mexico indirectly pay for the wall.

Financing – the Border Adjustment Tax

On January 26, Sean Spicer, the White House Press Secretary, announced that the Trump administration was considering a 20% tariff that would be levied on Mexican imports. This announcement was met with harsh backlash and arguments that this policy would only nominally make Mexico pay for the structure. The real burden would be posed on American consumers. [7] The administration later backtracked on its claim and stated that the 20% tariff was just one idea that they were considering. Soon after, the U.S. House of Representatives Republican Conference released a more diplomatic proposal – a Border Adjustment Tax.

The new Congress is proposing a tax plan [8] that would lower corporate taxes from 35 to 20 percent. This tax would be applied by area of consumption as opposed to area of production. This being said, all imports would be subject to the tax, while exports would have the tax refunded, making them effectively tax-free. [9]

Border adjustment taxes do not hold the same negative connotations as tariffs do. Currently, the United States has tariffs that accounted for $1.4tn in 2015. [10] Though considered protectionist, Border Adjustment Taxes have the diplomatic benefit of applying across the board so as not to single out a specific country. 160 countries have such policies. Whereas a tariff levied on Mexico would certainly strain relations, the United States’ neighbor to the south can hardly object to the use of a policy they, too, enforce.[8]

Then the question remains, how much revenue would this plan bring in? If the United States had a trade balance, a numerically equal subsidy to exports and tax on imports would leave no impact on government revenues. [9] However, the United States is running a trade deficit. This being the case, the budget adjustment would bring in revenues.

Image: The net-impact as a percent of GDP of implementing a border adjustment. Source: [Bloomberg]

One of the countries that the United States has a trade deficit with is Mexico. In 2016, the size of this deficit was $63.2 billion. [11] If this level of deficit were to continue and if these net imports were taxed at 20%, this would generate $12.6 billion in additional tax dollars per year. Given that high estimates for the cost of the wall range between $15 and $25 billion, revenue from the border adjustment tax coming from Mexico would pay it in no more than two years – Mexico may effectively pay for the wall after all.

Political Implications of Policy Proposals

In addition to affecting undocumented immigration, the economic and financial impact of the border wall have political implications for the Trump administration [12]. A cornerstone of President Trump’s platform was that he would construct the wall without having to raise taxes on Americans. The previously cited initial proposal of a 20 percent border tax represents a major deviation from the President’s earlier claims that the wall could be built without incurring the cost on American taxpayers as the proposed plan to levy a border tax would effectively impose financial burdens on Americans of all socioeconomic strata. This stands in stark contrast to Trump’s previous claims economic situations would improve, especially for middle class Americans, and that Mexico would pay for the construction of the wall. [13]

Although details are still in-the-works, top GOP lawmakers have confirmed that a Border Adjustment Tax and not a border tax, or tariff, will likely appear in the final GOP tax plan. [14] However, the proposed tax plan has come under fire from retailers and small businesses, especially those that rely on imports. [15] In its current state, the Border Adjustment Tax replaces the US’s 35% corporate tax rate with a lower business tax rate of 20%. [16] However, the reduction in the overall tax rate will be compensated for the fact that imports will no longer be counted as a business expense and exports will no longer be counted as business revenues. Moreover, firms will be able immediately write off the value of a depreciated assets. Proponents claim that the dollar will increase in value in response to the new tax plan as to negate any disadvantage for importer or advantage for exporters. [17] However, opponents claim that such a valuation of the dollar is unrealistic as other countries might implement their own retaliatory policies and that too many factors influence currency values to claim that the dollar will increase by a predictable amount.

Image: The value of imports for different American Industries. Source [Market Realist]

Although the direct impact of the proposed GOP border tax solution is still unknown, it is clear that President Trump’s border initiative will have significant financial and economic implications. From impacting America’s standing in the World Trade Organization to providing a positive demand-side shock, one thing is for certain, the consequences of the border wall will stretch far beyond the Mexico-US border.

PENN WHARTON PPIRESOURCE SPOTLIGHT:

<h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> ﻿Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>